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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 20-F/A
AMENDMENT NO. 1
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(Mark One)
[_]REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR
(g) OF THE SECURITIES EXCHANGE ACT OF 1934
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 2000
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
Commission file number: 1-15661
IFCO SYSTEMS N.V.
(Exact name of Registrant as specified in its charter)
The Netherlands
(Jurisdiction of incorporation or organization)
Rivierstaete, Amsteldijk 166,
1079 LH Amsterdam, The Netherlands
(Address of principal executive offices)
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Securities registered or to be registered pursuant to Section 12(g) of the Act:
Ordinary shares, nominal value (Euro)2 per share
(Title of class)
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act:
None
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report:
Ordinary shares issued and outstanding as of December 31, 2000: 43,934,650
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No [_]
Indicate by check mark which financial statement item the registrant has
elected to follow:
Item 17 [_] Item 18 [X]
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INTRODUCTION
This amendment amends the annual report of IFCO Systems N.V. for the year
ended December 31, 2000, as filed on July 3, 2001. Unless otherwise indicated,
all references in this amendment to we, us, our, and similar terms, as well as
references to the "Company" and "IFCO Systems," refer to IFCO Systems N.V. and
its subsidiaries after the contribution of the capital shares of the IFCO
Companies to IFCO Systems N.V. and to the IFCO Companies and their subsidiaries
before that time.
We are filing this amendment to make the following changes:
. In the table on page 33 of the annual report (page 4 of this amendment):
. Amortization of goodwill and other intangible assets for the year
ending December 31, 2000, was incorrectly stated as 1.6%. The table
has been corrected to reflect 1.8%.
. Income (loss) from operations--European perishables for the year
ending December 31, 2000, was incorrectly stated as $(16,381) and
(4.4)%. The table has been corrected to reflect $(11,519) and
(3.1)%.
. Income (loss) from operations--Dry goods for the year ending
December 31, 2000, was incorrectly stated as $6,103 and 1.6%. The
table has been corrected to reflect $1,241 and 0.3%.
. Total income (loss) from operations for the year ending December 31,
2000 was correctly stated in this table in the annual report.
. In the table on page 39 of the annual report (page 10 of this
amendment):
. Pro forma income (loss) from operations--European perishables for
the year ending December 31, 2000, was incorrectly stated as
$(16,381) and (3.3)%. The table has been corrected to reflect
$(11,519) and (2.3)%.
. Pro forma income (loss) from operations--Dry goods for the year
ending December 31, 2000, was incorrectly stated as $6,103 and 1.2%.
The table has been corrected to reflect $1,241 and 0.2%.
. Total pro forma income (loss) from operations for the year ending
December 31, 2000 was correctly stated in this table in the annual
report.
1
Cautionary Note Regarding Forward-looking Statements
Some of the statements contained in this amendment discuss future
expectations, contain projections of results of operations or financial
condition of IFCO Systems, or state other forward-looking information. These
statements may include financial information and/or statements for periods
following the period covered by this amendment. You can find many of these
statements by looking for words like believes, expects, anticipates, estimates,
or similar expressions used in this amendment.
These forward-looking statements may be affected by known and unknown risks,
uncertainties, and other factors that could cause the actual results to differ
materially from those contemplated by the statements. The forward-looking
information is based on various factors and was derived using numerous
assumptions that we believe to be reasonable. Risks and uncertainties include
the following: (1) our ability to effectively integrate our operations and
achieve our operational and growth objectives; (2) the competitive nature of
the container businesses, including returnable plastic containers (or RPCs),
pallets, and industrial containers; (3) customer demand and business and
economic cycles; (4) the ability to finance capital expenditures and growth;
(5) conditions in lumber markets; (6) seasonality; (7) weather conditions; (8)
the ability to sell the new pallet manufacturing operations and the terms of
that sale; (9) changes in national or international politics and economics;
(10) currency exchange rate fluctuations; and (11) changes in capital and
financial markets including the performance of companies listed on the
Frankfurt Stock Exchange or the Nasdaq National Market.
Important factors that could cause our actual results to be materially
different from the forward-looking statements are also discussed throughout
this amendment.
2
Item 5. Operating and Financial Review and Prospects
A. Operating results
The following table sets forth selected financial data for the periods
presented for each of our business segments and the same data as a percentage
of our total revenues. Functional currencies in our markets have been converted
to U.S. dollars, our reporting currency, at the weighted average exchange rate
during each period presented. The effect of these fluctuations in exchange
rates can affect comparison of the results of operations between periods.
During 2000 we acquired IFCO North America and the 2000 Purchased Companies
and accounted for them as purchases. The discussion of the results of
operations for the periods presented below reflect the activity of IFCO North
America and the 2000 Purchased Companies from their respective dates of
acquisition in 2000. See "Pro Forma Operating Results" for a presentation and
discussion of the pro forma results of operations for 2000 compared to 1999.
Reclassifications have been made in the 1999 and 1998 financial data to
conform to the 2000 presentation and are discussed below where applicable.
For the year ending December 31,
-----------------------------------------------
1998 1999 2000
-------------- -------------- ---------------
(dollars in thousands)
Revenues:
--European perishables...... $125,128 91.9% $141,984 91.8% $129,967 34.9%
--Pallet services........... -- -- -- -- 132,994 35.8
--Drum reconditioning....... -- -- -- -- 86,008 23.1
--Non-European perishables.. 1,147 0.8 2,588 1.7 14,268 3.8
--Dry goods................. 9,901 7.3 10,154 6.5 9,238 2.5
--Intercompany sales........ -- -- -- -- (320) (0.1)
-------- ----- -------- ----- -------- -----
136,176 100.0 154,726 100.0 372,155 100.0
Cost of sales:
--European perishables...... 96,884 71.2 115,154 74.5 118,434 31.9
--Pallet services........... -- -- -- -- 106,812 28.7
--Drum reconditioning....... -- -- -- -- 69,206 18.6
--Non-European perishables.. 717 0.5 1,864 1.2 14,136 3.8
--Dry goods................. 8,617 6.3 7,467 4.8 6,796 1.8
--Intercompany cost of
sales...................... -- -- -- -- (320) (0.1)
-------- ----- -------- ----- -------- -----
106,218 78.0 124,485 80.5 315,064 84.7
Total gross profit........... 29,958 22.0 30,241 19.5 57,091 15.3
Selling, general and
administrative expenses:
--European perishables...... 20,694 15.2 21,239 13.7 23,998 6.4
--Pallet services........... -- -- -- -- 24,473 6.6
--Drum reconditioning....... -- -- -- -- 10,978 2.9
--Non-European perishables.. 1,629 1.2 2,128 1.4 3,918 1.1
--Dry goods................. 1,966 1.4 1,144 0.7 1,324 0.4
-------- ----- -------- ----- -------- -----
24,289 17.8 24,511 15.8 64,691 17.4
3
For the year ending December 31,
--------------------------------------------------
1998 1999 2000
-------------- -------------- ----------------
(dollars in thousands)
Merger and integration
costs.................... -- -- 3,519 2.2 -- --
Amortization of goodwill
and other intangible
assets................... 383 0.3 289 0.2 6,709 1.8
Other operating expense
(income), net............ (864) (0.6) (639) (0.4) (1,956) (0.6)
Income (loss) from
operations
--European perishables... 8,048 5.9 1,698 1.1 (11,519) (3.1)
--Pallet services........ -- -- -- -- (1,642) (0.4)
--Drum reconditioning.... -- -- -- -- 3,572 1.0
--Non-European
perishables............. (1,216) (0.9) (965) (0.6) (4,005) (1.1)
--Dry goods.............. (682) (0.5) 1,828 1.2 1,241 0.3
-------- ---- -------- ---- --------- -----
6,150 4.5 2,561 1.7 (12,353) (3.3)
Corporate expenses........ -- -- -- -- (7,351) (2.0)
Other expenses, net....... (10,765) (7.9) (13,266) (8.6) (22,835) (6.1)
Income tax provision...... (210) (0.2) (320) (0.2) (245) (0.1)
Minority interest......... (1,274) (0.9) (1,291) (0.8) -- --
Losses from equity
entities, net............ (2,726) (2.0) (1,738) (1.2) (286) (0.1)
-------- ---- -------- ---- --------- -----
Loss from continuing
operations before
discontinued operations,
extraordinary loss and
cumulative effect of
change in accounting
principle................ (8,825) (6.5) (14,054) (9.1) (43,070) (11.6)
Loss from discontinued
operations............... -- -- -- -- (62,465) (16.8)
Extraordinary loss on
early extinguishment of
debt..................... -- -- -- -- (5,600) (1.5)
Cumulative effect of
change in accounting
principle................ -- -- -- -- 770 0.2
Participating rights...... (88) (0.0) 175 0.1 -- --
-------- ---- -------- ---- --------- -----
Net loss.................. $ (8,913) (6.5)% $(13,879) (9.0)% $(110,365) (29.7)%
======== ==== ======== ==== ========= =====
Year ended December 31, 2000, Compared to Year Ended December 31, 1999
Revenues
Our total revenues increased $217.5 million, or 140.6%, to $372.2 million in
2000 from $154.7 million in 1999, primarily due to the acquisition of PalEx,
IFCO-U.S., and the 2000 Purchased Companies.
European Perishables RPC Operations. Net revenues from the European
perishables RPC operations decreased $12.0 million, or 8.5%, to $130.0 million
in 2000 from $142.0 million in 1999. Revenues actually increased $7.9 million,
or 5.6%, but the increase was offset by a decrease of $19.9 million caused by a
decline in the currency exchange rate relative to 1999. The increase in
revenues was primarily attributable to a higher penetration of existing
customers and the addition of new retailers to our round-trip systems. Total
annual RPC trips increased by 3.7% in 2000 over 1999.
Pallet Services and Drum Reconditioning. Revenues from pallet services were
$133.0 million and revenues from drum reconditioning were $86.0 million in 2000
as a result of the PalEx merger and the acquisition of the 2000 Purchased
Companies. These results were included from the respective dates of
acquisition.
Non-European Perishables RPC Operations. Revenues for the non-European
perishables RPC operations increased by $11.7 million to $14.3 million in 2000
compared to $2.6 million in 1999. Non-European perishables RPC operations
include both North American and South American operations for 2000. In March
2000, we acquired the remaining minority interest in IFCO-U.S., which provides
RPC services in North America. The revenues for North America RPCs are included
in our results of operations in 2000 from the date of the IPO and accounted for
$9.8 million of the increase in revenues for non-European perishables RPC
operations. Prior to the IPO, the results of operations of IFCO-U.S. were
accounted for using the equity method of accounting. In addition, prior to the
IPO, non-European perishables RPC operations only included our
4
Argentina operation. Revenues from our Argentina operation increased by $1.8
million, or 71.2%, to $4.4 million in 2000 compared to $2.6 million in 1999.
Dry Goods RPC Operation. Net revenues from dry goods RPC operations
decreased $1.0 million, or 9.8%, to $9.2 million in 2000 from $10.2 million in
1999. Revenues actually increased $0.5 million, or 4.9%, but the increase was
offset by a decrease of $1.5 million caused by a decline in the currency
exchange rate relative to 1999.
Cost of Sales and Gross Profit
Gross profit increased to $57.1 million in 2000 from $30.2 million in 1999,
primarily due to the acquisition of PalEx, IFCO-U.S., and the 2000 Purchased
Companies. Gross profit as a percentage of revenues decreased to 15.3% in 2000
from 19.5% in 1999.
European Perishables RPC Operations. Net cost of sales increased $3.2
million, or 2.8%, to $118.4 million in 2000 compared to $115.2 million in 1999.
Cost of sales actually increased $21.4 million, but the increase was offset by
a decrease of $18.2 million due to a decline in the currency exchange rate
relative to 1999. The increase in cost of sales for 2000 was primarily
attributable to higher logistic costs. In addition, we recognized an
incremental, non-cash depreciation charge of $9.2 million for adjustments to
reduce the cost of our RPC pool as a result of the reassessment of the useful
life and the analysis of historical and future breakage and pool development
for the main RPC pool. Cost of sales for European perishables RPC operations
also includes a charge of $4.9 million for long-lived asset impairment for the
book value of certain pooled transport containers called Econoboxes. The
Econoboxes, which are relatively large containers used for the transport of
goods, were supplied by a subsidiary of General Electric Company pursuant to a
supply agreement. The Econobox program began in 1998. Due to reliability and
durability characteristics of the Econobox and lower-than-expected demand for
the product, we plan to discontinue the program in 2001. In June 2001, we
terminated the supply contract with the Econobox supplier with no material
adverse effect on us. The effect of the change in foreign currency exchange
rates on revenues and cost of sales for 2000 resulted in a decrease in gross
profit percentage of 1.4%. Adjusted for the effect of the change in the
currency exchange rate, gross profit decreased $13.5 million to 10.2% of
related revenues for 2000 compared to 18.9% for 1999.
Pallet Services and Drum Reconditioning. Cost of sales for pallet services
was $106.8 million and cost of sales from drum reconditioning was $69.2
million. In 2000, gross profit as a percentage of revenues for pallet services
was 19.7% of related revenues and gross profit for drum reconditioning was
19.5% of related revenues.
Non-European Perishables RPC Operations. Cost of sales for the non-European
perishables RPC operations increased by $12.2 million to $14.1 million in 2000
compared to $1.9 million in 1999. Costs of sales for North America RPCs
accounted for $10.9 million of the increase. Cost of sales for our Argentina
operation increased by $1.4 million to $3.4 million in 2000 compared to $1.9
million in 1999. The gross profit from our non-European perishables RPC
operations was negligible since these operations are still in a start-up phase
as they work to add customers and retailers and increase market share.
Dry Goods RPC Operations. Net cost of sales for dry goods RPC operations
decreased $0.7 million, or 9.3%, to $6.8 million in 2000 from $7.5 million in
1999. Cost of sales actually increased 5.3%, or $0.4 million, but the increase
was offset by a decrease of $1.0 million caused by a decline in the currency
exchange rate relative to 1999. Gross profit as a percentage of revenues was
26.4% of revenues for this segment in 2000 compared to 26.5% of related
revenues in 1999.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased to $64.7 million in
2000 from $24.5 million in 1999, primarily due to the acquisition of PalEx,
IFCO-U.S., and the 2000 Purchased Companies. Selling,
5
general and administrative expenses as a percentage of revenues increased to
17.4% in 2000 from 15.8% in 1999.
European Perishables RPC Operations. Net selling, general and administrative
expenses increased $2.8 million to $24.0 million in 2000 compared to $21.2
million in 1999. Selling, general and administrative expenses actually
increased $6.4 million, but the increase was offset by a decrease of $3.7
million due to a decline in the currency exchange rate relative to 1999. The
increase in selling, general and administrative expenses was primarily
attributable to an increase in the size of the sales and marketing organization
in Europe, as well as an increase in the staff of the European operating
headquarters, increased advertising, and consulting costs.
Pallet Services and Drum Reconditioning. Selling, general and administrative
expenses for pallet services were $24.5 million and selling, general and
administrative expenses for drum reconditioning were $11.0 million. These
expenses constituted 18.4% of pallet service revenues and 12.8% of drum
reconditioning revenues.
Non-European Perishables RPC Operations. Selling, general and administrative
expenses increased $1.8 million, or 85.7%, to $3.9 million in 2000 compared to
$2.1 million in 1999, which mainly reflected our Argentina operation. These
expenses were 27.5% of related revenues in 2000 compared to 82.2% of related
revenues in 1999. Selling, general and administrative expenses for our
Argentina operation increased $1.5 million to $3.6 million in 2000 from $2.1
million in 1999. The increase in selling, general and administrative expenses
for Argentina included costs of $1.2 million in connection with start-up
operations in Chile, Mexico, and Uruguay and our subsequent decision in 2000 to
close those new operations.
Dry Goods RPC Operations. Net selling, general and administrative expenses
increased $0.2 million, or 18.2%, to $1.3 million in 2000 from $1.1 million in
1999. Selling, general and administrative expenses actually increased $0.4
million, but the increase was offset by a decrease of $0.2 million caused by a
decline in the currency exchange rate relative to 1999.
Other Items
Amortization of Goodwill and Other Intangible Assets. Amortization of
goodwill and other intangible assets increased by $6.4 million to $6.7 million
in 2000 compared to $0.3 million in 1999. The increase was attributable to the
amortization of goodwill in conjunction with the PalEx merger.
Other Operating Expense (Income), Net. Other operating income was primarily
the recovery of an outstanding tax claim in Switzerland.
Corporate Expenses. Corporate expenses represented the expenses of the
parent company, IFCO Systems N.V., and IFCO North America.
Other Expenses, Net. Other expenses, net included interest expense of $24.8
million, which increased by $16.5 million over interest expense in 1999 of $8.3
million. The increase in interest expense was attributable to the interest on
our senior subordinated notes, the additional borrowings for working capital
for Europe and North America under our senior credit facility, and additional
borrowings under the term loan facility of our senior credit facility to
finance the cash portion of the purchase price of the 2000 Purchased Companies.
We recorded a foreign currency gain of $5.8 million in 2000 compared to a
foreign currency loss of $1.1 million in 1999. The elimination of a loss was
primarily attributable to a favorable change in the exchange rate between the
U.S. dollar and the euro.
6
Losses from equity entities decreased by $1.4 million to $0.3 million in
2000 compared to $1.7 million in 1999. Our investment in IFCO-U.S. was
accounted for as an equity investment in 1999, but was included in the combined
and consolidated results of operations in 2000 since we purchased the remaining
minority interest as of the date of the IPO.
Loss From Discontinued Operations
Our loss from discontinued operations included a provision for loss on the
disposal of the new pallet manufacturing operations of $59.9 million. The
components of this provision included the following: (1) $2.8 million for
operating losses during the phase out period, (which is the period from
December 31, 2000, to the anticipated disposal date), including interest of
$3.8 million; (2) costs and expenses to exit the new pallet manufacturing
operation of $2.0 million; and (3) the carrying amount of the net assets of the
new pallet manufacturing operation in excess of the estimated proceeds from
disposal of approximately $55.1 million. We expect our proceeds from disposal
of the new pallet manufacturing operations to total $54.3 million.
Costs and Expenses Related to Our Strategic Initiatives
Our results of operations for 2000 included $1.4 million of costs and
expenses incurred in conjunction with our development of IFCO Online.
IFCO Online. We intend to develop tracking and tracing technology in the
materials movement industry through IFCO Online. See "B. Business overview--
Systems and Services--IFCO Online." in Item 4, "Information on the Company." In
2000, we incurred $1.4 million in costs and expenses related to the development
of the tracking and tracing programs at IFCO Online.
Effect of Non-Cash Items on Results of Operations
Our significant non-cash items in 2000, other than amortization of goodwill
and loss on asset impairment, which are discussed above, are summarized below.
Our results of operations for 2000 include an extraordinary loss on the
extinguishment of debt of $5.6 million. The loss occurred as a result of the
write-off of unamortized deferred bank fees and other charges related to credit
facilities that were paid off in conjunction with the IPO and merger.
We undertook a comprehensive review of our accounting for RPC refurbishment
costs during the first quarter of 2000. As a result of this review, we
concluded that we should adopt a new accounting method that we believe most
fairly matches the RPC refurbishing costs with the revenue to which it is
related. Accordingly, we now charge costs of sales for refurbishing expenses
when an RPC begins the trip cycle and subsequently record the proportionate
expense throughout the trip cycle. The underlying reason for this change in
accounting policy is that refurbishing an RPC prepares it for the next trip
cycle. Prior to 2000, we charged cost of sales for refurbishing expenses when
the RPC finished the trip cycle. While the our previous accounting policy for
refurbishing costs was in accordance with U.S. GAAP, we believe the policy
adopted in 2000 is preferable. We have presented this policy change as a
cumulative change in accounting principle as a credit of $0.8 million.
As discussed above under "Cost of Sales and Gross Profit--European
Perishables RPC Operations," cost of sales for our European perishables RPC
operations included an adjustment, which was included in depreciation, to the
book value of RPCs of $9.2 million for a reduction in the cost of the Company's
RPC pool as a result of the reassessment of useful life and the analysis of
historical and future breakage and pool development for the main RPC pool.
7
Net Loss
As a result of the foregoing, the Company's net loss increased by $96.5
million from $13.9 million in 1999 to $110.4 million in 2000. The increase was
primarily due to the increase in loss from discontinued operations of $61.9
million, the increase in interest expense of $16.5 million, and the
extraordinary loss on early extinguishment of debt of $5.6 million.
Year ended December 31, 1999, Compared to Year Ended December 31, 1998
Revenues
Our total revenues increased $18.5 million, or 13.6%, to $154.7 million in
1999 from $136.2 million in 1998. Revenues for 1998 reflect reclassification of
sales of granulate from other operating income to revenues to conform to the
1999 presentation.
European Perishables RPC Operations. Revenues from the European perishables
RPC operations increased $16.9 million, or 13.5%, to $142.0 million in 1999
from $125.1 million in 1998. This increase was primarily attributable to an
increase of 14.0% in the number of RPCs used, in the round-trip systems for
fresh produce, and to a higher number of trips per RPC. This revenue increase
was partially offset by a decrease of 4.1% related to changes in currency
exchange rates relative to the previous period. The revenue increase was also a
result of our establishing new retail partners, favorable harvests of citrus
fruit, and increased business from existing customers. Revenues for 1999
reflect the correction of an information systems error that created a one-day
duplication of revenues in Spain in the first month of 1999, resulting in a
decrease of revenues of $0.4 million. Revenues for European perishables
operations for 1998 reflect reclassifications of sales of granulate from other
operating income to revenues to conform to the 1999 presentation.
Non-European Perishables RPC Operations. Revenues from the non-European
perishables RPC operations increased $1.5 million or 136.4%, to $2.6 million in
1999 from $1.1 million in 1998, as a result of increased volume in Argentina.
Dry Goods RPC Operations. Revenues from the dry goods RPC operations
increased $0.3 million, or 3.0%, to $10.2 million in 1999 from $9.9 million in
1998, as a result of increased business with a major customer and new business
with Deutsche Post AG as a result of the contract that began in September 1999.
This increase was offset by a decrease of 4.1% related to changes in currency
exchange rates relative to the previous period.
Cost of Sales and Gross Profit
Gross profit increased to $30.2 million in 1999 from $30.0 million in 1998,
primarily due to increased sales volume. Gross profit as a percentage of
revenues decreased from 22.0% in 1998 to 19.5% in 1999.
European Perishables RPC Operations. The decrease in gross margin was
primarily due to additional freight costs incurred to transport RPCs over
longer distances in Europe and a non-recurring charge for RPC breakage in
Europe. Additional costs, net of a reimbursement from Schoeller Plast AG, were
incurred in 1999 as markets expanded in Europe. Cost of sales for 1999 reflect
account charges for the full year in the treatment of washing costs in Denmark,
an increased expense of $0.6 million, and an additional accrual for deposits
payable based on the actual number of RPCs outstanding to customers in Spain,
an increased expense of $0.7 million. In addition, costs of sales for 1999
reflect the correction of an information systems error that created an
underreporting of transportation costs, resulting in increased cost of sales of
$0.5 million.
Non-European Perishables RPC Operations. Gross margin for non-European
perishables RPC operations sales was slightly lower in 1999 compared to 1998
due to additional start-up costs incurred in South American countries to expand
market share.
Dry Goods RPC Operations. Gross margin from dry goods RPC operations as a
percentage of related revenues increased from 13.0% in 1998 to 26.5% in 1999,
primarily due to a reduction in internal RPC handling costs.
8
Selling, General and Administrative Expenses and Other Operating Income
(Expenses), Net
Selling, general and administrative expenses and other operating income
(expense), net increased $0.5 million, or 2.1%, to $23.9 million in 1999 from
$23.4 million in 1998 and decreased as a percentage of revenues to 15.4% in
1999 from 17.2% in 1998. Certain expenses increased in 1999 accompanying growth
in sales volume. Selling, general and administrative expenses increased in 1999
accompanying growth in sales volume. Selling, general and administrative
expenses and other income (expenses), net as a percentage of revenues decreased
due to expenditures made in 1998 to prepare for the increase in business that
we anticipated in 1999. Thus, the dollar increase was at a lower rate than the
growth in revenues. Selling, general and administrative expenses and other
operating income (expense), net for 1998 reflects reclassification of sales of
granulate to revenues and reclassification of factoring costs and expense to
other income and expense to conform to the 1999 presentation.
Other Items
Merger and Integration Costs. Merger and integration costs consisted of $2.8
million for transaction costs incurred by PalEx, which we agreed to reimburse,
and $0.7 million for severance pay and other costs related to the IPO.
Other Expenses, Net. Interest expense increased $0.2 million, or 2.5%, to
$8.3 million in 1999 from $8.1 million in 1998. Interest income decreased $1.0
million, or 62.5%, to $0.6 million in 1999 from $1.6 million in 1998. The
decrease in interest income was primarily a result of the reduction of
receivables from related parties due to the requirement under our credit
facilities. Other income and expense for 1998 reflects reclassification of
factoring costs and expense from other operating income to conform to the 1999
presentation.
Foreign currency losses increased $0.9 million, or 450.0%, to $1.1 million
in 1999 from $0.2 million in 1998, primarily due to changes in the U.S. dollar
and British pound exchange rates.
Losses from equity investments decreased $1.0 million, or 37.0%, to $1.7
million in 1999 from $2.7 million in 1998.
Net Loss
As a result of the foregoing, net loss increased to $13.9 million in 1999
from $8.9 million in 1998.
Pro Forma Operating Results
The following table sets forth selected pro forma financial data for the
years ended December 31, 1999 and 2000. The pro forma financial data gives
effect to the PalEx merger, the IPO, the initial offering of our senior
subordinated notes, initial borrowings under our senior credit facility, other
related transactions in March 2000, including the acquisition of the remaining
minority interest in IFCO-U.S. and IFCO Europe, and the acquisitions of the
2000 Purchased Companies as if each had occurred on January 1 of each year
presented. The results of operations of IFCO North America, IFCO-U.S., and the
2000 Purchased Companies are, therefore, included for the entire periods
presented.
9
Functional currencies in our markets have been converted to U.S. dollars at
the weighted average exchange rate during each period presented. The effect of
these fluctuations in exchange rates have affected the comparison of the
results of operations between periods and are noted in the discussion below.
For the year ending December
31,
----------------------------------
1999 2000
--------------- ----------------
(dollars in thousands)
(unaudited)
Revenues:
--European perishables................... $141,984 31.1% $ 129,967 26.3%
--Pallet services........................ 185,822 40.7 228,965 46.3
--Drum reconditioning.................... 110,434 24.2 110,763 22.4
--Non-European perishables............... 8,339 1.8 15,665 3.2
--Dry goods.............................. 10,154 2.2 9,238 1.9
--Intercompany sales..................... -- -- (320) (0.1)
-------- ----- --------- -----
456,733 100.0 494,278 100.0
Cost of sales:
--European perishables................... 115,154 25.2 118,434 24.0
--Pallet services........................ 131,220 28.7 174,411 35.3
--Drum reconditioning.................... 87,567 19.2 89,780 18.2
--Non-European perishables............... 7,240 1.6 15,524 3.1
--Dry goods.............................. 7,467 1.6 6,796 1.4
--Intercompany sales..................... -- -- (320) (0.1)
-------- ----- --------- -----
348,648 76.3 404,625 81.9
Total gross profit........................ 108,085 23.7 89,653 18.1
Selling, general and administrative
expenses:
--European Perishables................... 21,239 4.7 23,998 4.9
--Pallet Services........................ 34,801 7.6 43,313 8.8
--Drum Reconditioning.................... 11,557 2.5 13,025 2.6
--Non-European Perishables............... 4,273 0.9 4,363 0.9
--Dry Goods.............................. 1,144 0.3 1,324 0.2
-------- ----- --------- -----
73,014 16.0 86,023 17.4
Merger and integration costs.............. 3,519 0.8 -- --
Amortization of goodwill and other
intangible assets........................ 10,591 2.3 10,304 2.1
Other operating expense (income), net..... (639) (0.1) (1,956) (0.4)
-------- ----- --------- -----
Income (loss) from operations:
--European perishables................... 1,080 0.2 (11,519) (2.3)
--Pallet services........................ 13,515 3.0 4,986 1.0
--Drum reconditioning.................... 8,085 1.8 5,050 1.0
--Non-European perishables............... (2,908) (0.7) (4,476) (0.9)
--Dry goods.............................. 1,828 0.4 1,241 0.2
-------- ----- --------- -----
21,600 4.7 (4,718) (1.0)
Corporate expenses........................ (4,816) (1.1) (10,416) (2.1)
Other expenses, net....................... (22,941) (4.9) (28,405) (5.7)
Income tax (provision) benefit............ (8,154) (1.8) (465) (0.1)
Minority interest......................... (1,291) (0.3) -- --
Losses from equity entities, net.......... (1,738) (0.4) 131 0.0
-------- ----- --------- -----
Loss from continuing operations before
discontinued operations, extraordinary
loss and cumulative effect of change in
accounting principle..................... (17,340) (3.8) (43,873) (8.9)
Income (loss) from discontinued
operations............................... 6,377 1.4 (61,279) (12.4)
Extraordinary loss on early extinguishment
of debt.................................. -- -- (5,600) (1.2)
Cumulative effect of change in accounting
principle................................ -- -- 770 0.2
-------- ----- --------- -----
Net loss.................................. $(10,963) (2.4)% $(109,982) (22.3)%
======== ===== ========= =====
Revenues.
Pro forma revenues increased $37.6 million, or 8.2% to $494.3 million in
2000 compared to $456.7 million in 1999.
10
European Perishables RPC Operations. Net revenues from the European
perishables RPC operations decreased $12.0 million, or 8.5%, to $130.0 million
in 2000 from $142.0 million in 1999. Revenues actually increased $7.9 million,
or 5.6%, but the increase was offset by a decrease of $19.9 million caused by a
decline in the currency exchange rate relative to 1999. The increase in
revenues was primarily attributable to a higher penetration of existing
customers and the addition of new retailers to our round-trip systems. Total
annual RPC trips increased to 194.6 million in 2000 from 187.6 million in 1999.
Pallet Services. Pro forma pallet services revenues increased $43.2 million,
or 23.3%, to $229.0 million in 2000 from $185.8 million in 1999. Revenues in
1999 were negatively affected by the loss of sales to CHEP USA, which was a
result of the decision to discontinue selling to CHEP USA in 1998. "Same store"
sales of recycled pallets increased $23.2 million, or 27.9%, in 2000 compared
to 1999 and were primarily the result of our efforts to replace the lost CHEP
USA sales. The replacement sales were from existing recycled and remanufactured
pallet products offered to both existing and new customers through additional
sales and marketing efforts. In an effort to replace the business with CHEP
USA, we aggressively pursued recycled pallet programs with Wal-Mart and Sam's
Wholesale Clubs. These programs were implemented by PalEx beginning in 1998,
but were terminated in their entirety at successive locations during 2000. The
Wal-Mart and Sam's recycling programs were replaced with recycling programs
with K-Mart beginning during the second quarter of 2000. In addition to the
sales and marketing efforts, we converted two of our North American
manufacturing facilities from the manufacture of CHEP pallets to the processing
of recycled and remanufactured pallets and opened three additional plants for
the express purpose of providing additional supplies of recycled and
remanufactured pallets. Sales for the 2000 Purchased Companies increased $18.3
million, or 21.2%, in 2000 compared to 1999, primarily due to aggressive
marketing strategy in the Southwestern United States. Rental revenues from our
Canadian pallet rental pool increased $1.6 million, or 9.9%, to $17.8 million
in 2000 from $16.2 million in 1999. There was no material difference in the
exchange rates between 2000 and 1999 that were used to convert the results of
operations of our Canadian operations.
Drum Reconditioning. Pro forma revenues for drum reconditioning were
relatively unchanged in 2000 compared to 1999. Drum reconditioning revenues
from agricultural customers declined in the Southwestern United States, but the
decline was offset by an increase in revenues from industrial customers in the
Southeastern United States.
Non-European Perishables RPC Operations. Pro forma revenues for non-European
perishables RPC operations increased $7.4 million, or 89.2%, to $15.7 million
in 2000 compared to $8.3 million in 1999. The increase is attributable to
increased revenues from RPC operations in North America, where pro forma
revenues increased from $5.8 million in 1999 to $11.2 million in 2000, and to
the revenue increase from our Argentina operation, where revenues increased by
$1.8 million to $4.4 million in 2000 compared to $2.6 million in 1999. The
North American RPC operation expanded its RPC pool and benefited from
additional sales from RPC programs with large retailers.
Dry Goods RPC Operations. Net revenues from dry goods RPC operations
decreased $1.0 million, or 9.8%, to $9.2 million in 2000 from $10.2 million in
1999. Revenues actually increased $0.5 million, or 4.9%, but the increase was
offset by a decrease of $1.5 million caused by a decline in the currency
exchange rate relative 1999.
Cost of Sales and Gross Profit
Pro forma cost of sales increased $56.0 million, or 16.1% to $404.6 million
in 2000 compared to $348.6 million in 1999. Pro forma gross profit decreased
$18.4 million, or 17.0%, to $89.7 million for 2000 compared to $108.1 million
in 1999.
European Perishables RPC Operations. Net cost of sales increased $3.2
million, or 2.8%, to $118.4 million in 2000 compared to $115.2 million in 1999.
Cost of sales actually increased $21.4 million, but the increase was offset by
a decrease of $18.2 million due to a decline in the currency exchange rate
relative to
11
1999. The increase in cost of sales for 2000 was primarily attributable to
higher logistic costs. In addition, we recognized an incremental, non-cash
depreciation charge of $9.2 million for adjustments to reduce the cost of our
RPC pool as a result of the reassessment of the useful life and the analysis of
historical and future breakage and pool development for the main RPC pool. Cost
of sales for European perishables RPC operations also includes a charge of $4.9
million for long-lived asset impairment for the book value of certain pooled
transport containers called Econoboxes. The Econoboxes, which are relatively
large containers used for the transport of goods, were supplied by a subsidiary
of General Electric Company pursuant to a supply agreement. The Econobox
program began in 1998. Due to reliability and durability characteristics of the
Econobox and lower-than-expected demand for the product, we plan to discontinue
the program in 2001. We thereafter cancelled the supply contract with the
Econobox supplier with no material adverse effect on us. The effect of the
change in foreign currency exchange rates on revenues and cost of sales for
2000 resulted in a decrease in gross profit percentage of 1.4%. Adjusted for
the effect of the change in the currency exchange rate, gross profit decreased
$13.5 million to 10.2% of related revenues for 2000 compared to 18.9% for 1999.
Pallet Services. Pro forma cost of sales for pallet services increased $43.2
million, or 32.9%, to $174.4 million in 2000 compared to $131.2 million in
1999. Gross profit as a percentage of related pro forma revenues decreased to
23.8% in 2000 compared to 29.4% in 1999. Gross margin declined in 2000 due to
reduced prices designed to capture market share and increased cost of reusable
pallet cores.
Drum Reconditioning. Pro forma cost of sales for drum reconditioning
increased $2.2 million, or 2.5%, to $89.8 million in 2000 compared to $87.6
million in 1999. Gross profit as a percentage of related pro forma revenues
decreased to 18.9% in 2000 from 20.7% in 1999. Gross margin declined in 2000
due to the decline in sales to agricultural customers, which were replaced by
lower gross margin sales to industrial customers.
Non-European Perishables RPC Operations. Pro forma cost of sales for non-
European perishables RPC operations increased $8.3 million to $15.5 million in
2000 from $7.2 million in 1999, primarily due to the increased volume of
revenues in the North American RPC perishables operations. Gross margin as a
percentage of related pro forma revenues decreased to 0.9% in 2000 from 13.2%
in 1999. The decrease in gross margin percentage was primarily attributable to
the North American operation, where the costs of developing and establishing an
RPC market were higher than in our European RPC operations. The North American
and Argentina RPC operations are still developing and can be expected to
continue to reflect low gross margins.
Dry Goods RPC Operations. Net cost of sales for dry goods RPC operations
decreased $0.7 million, or 9.3%, to $6.8 million in 2000 from $7.5 million in
1999. Cost of sales actually increased 5.3%, or $0.4 million, but the increase
was offset by a decrease of $1.0 million caused by a decline in the currency
exchange rate relative to 1999. Gross profit as a percentage of revenues was
26.4% of revenues for this segment in 2000 compared to 26.5% of related
revenues in 1999.
Selling, General and Administrative Expenses
Pro forma selling, general and administrative expenses increased $13.0
million, or 17.8%, to $86.0 million in 2000 compared to $73.0 million in 1999.
The increase was primarily attributable to the pallet services and drum
reconditioning segments.
European Perishables RPC Operations. Net selling, general and administrative
expenses increased $2.8 million to $24.0 million in 2000 compared to $21.2
million in 1999. Selling, general and administrative expenses actually
increased $6.4 million, but the increase was offset by a decrease of $3.7
million due to a decline in the currency exchange rate relative to 1999. The
increase in selling, general and administrative expenses was primarily
attributable to an increase in the size of the sales and marketing organization
in Europe, as well as an increase in the staff of the European operating
headquarters, increased advertising, and consulting costs.
Pallet Services. Pro forma selling, general and administrative expenses for
pallet services increased $8.5 million, or 24.4%, to $43.3 million in 2000
compared to $34.8 million in 1999. The increase was primarily
12
attributable to the allocation of North American corporate expenses. See "Other
Items--Corporate Expenses" below for a description of the corporate expenses.
Drum Reconditioning. Pro forma selling, general and administrative expenses
for drum reconditioning increased $1.4 million, or 12.1%, to $13.0 million in
2000 compared to $11.6 million in 1999. The increase was primarily attributable
to the allocation of North American corporate expenses. See "Other Items--
Corporate Expenses" below for a description of the corporate expenses.
Non-European Perishables RPC Operations. Pro forma selling, general, and
administrative expenses for non-European perishables RPC operations increased
$0.1 million to $4.4 million in 2000 from $4.3 million in 1999. Selling,
general and administrative expenses for 2000 are net of a marketing cost and
expense reimbursement from our RPC supplier in North America in the amount of
$2.0 million. Excluding this reimbursement, selling, general and administrative
expenses for our North American RPC operation increased $0.6 million in 2000
over 1999. The increase was attributable to the added administrative and
operational infrastructure required to expand RPC operations in North America.
Dry Goods RPC Operations. Net selling, general and administrative expenses
increased $0.2 million, or 18.2%, to $1.3 million in 2000 from $1.1 million in
1999. Selling, general and administrative expenses actually increased $0.4
million, but the increase was offset by a decrease of $0.2 million caused by a
decline in the currency exchange rate relative to 1999.
Other Items
Amortization of Goodwill and Other Intangible Assets. Amortization of
goodwill and other intangible assets was primarily attributable to the
amortization related to the PalEx merger and the acquisition of the 2000
Purchased Companies.
Corporate Expenses. Corporate expenses net of allocations increased $5.6
million, or 116.7%, to $10.4 million in 2000 compared to $4.8 million in 1999.
The amount for 1999 represented the corporate expenses of PalEx. The increase
was primarily attributable to the creation of the new corporate entity, the
effect of the creation of a managerial and operating infrastructure in North
America, which was begun in late 1999, the creation of a management
infrastructure for IFCO Systems, and the additional costs of being a public
company.
Other Expenses, Net. Other expenses, net increased $5.5 million, or 24.0%,
to $28.4 million in 2000 compared to $22.9 million in 1999. The increase was
primarily attributable to interest expense, which increased to $34.6 million in
2000 from $26.4 million in 1999. Interest expense increased due to additional
borrowings in 2000 for working capital needs for European and North American
operations. We recorded a foreign currency gain of $5.8 million in 2000
compared to a foreign currency loss of $1.1 million in 1999. The elimination of
a loss was primarily attributable to a favorable change in the exchange rate
between the U.S. dollar and the euro. Miscellaneous income decreased $2.3
million from 1999 to 2000.
Income (Loss) From Discontinued Operations
Income from discontinued operations for 1999 represents the pro forma income
from the new pallet manufacturing operations for that period. Our loss from
discontinued operations includes a provision for loss on the disposal of the
new pallet manufacturing operations of $59.9 million. The components of this
provision include the following: (1) $2.8 million for operating losses during
the phase out period, (which is the period from December 31, 2000, to the
anticipated disposal date), including interest of $3.8 million; (2) costs and
expenses to exit the manufacturing operation of $2.0 million; and (3) the
carrying amount of the net assets of manufacturing operation in excess of the
proceeds from disposal of approximately $55.1 million. We expect our proceeds
from disposal of the new pallet manufacturing operations to total $54.3
million.
13
Net Loss
As a result of the foregoing, the Company's pro forma net loss increased
$99.0 million from $11.0 million in 1999 to $110.0 million in 2000. The
increase was primarily due to the increase in loss from discontinued operations
of $60.7 million, the increase in interest expense of $8.2 million, and the
extraordinary loss on early extinguishment of debt of $5.6 million.
Impact of Inflation
The results of our operations for the periods discussed have not been
materially affected by inflation.
Seasonality
Our RPC revenues vary depending on the fruit and vegetable harvesting season
in different countries. Historically, a higher portion of our sales and
operating income from RPCs has been recognized in the fourth quarter than in
the first quarter, which has historically been the weakest quarter. Revenues in
Germany and France, for example, are highest in summer and fall. Revenues in
Southern Europe reach a peak late in fall and throughout winter. Seasonality
also has an influence on pricing, as transportation costs incurred during the
winter to transport our RPCs from warmer countries in Southern Europe are
higher than the costs to transport the RPCs from closer locations in Central
Europe. We accordingly charge customers in these Southern European countries
higher usage fees.
The pallet manufacturing, recycling, and crating business in North America
are subject to seasonal variations in operations and demand. The third quarter
is traditionally the quarter with the lowest demand for these businesses. We
have a significant number of agricultural customers for these businesses and
typically experience the greatest demand for new pallets from these customers
during the citrus and produce harvesting seasons, generally October through
May. Yearly results can fluctuate significantly in this region depending on the
size of the citrus and produce harvests, which, in turn, largely depend on the
occurrence and severity of freezing weather and changes in rainfall. Adverse
weather conditions may also affect our ability to obtain adequate supplies of
lumber at a reasonable cost. Our North American locations serving predominantly
manufacturing and industrial customers experience less seasonality. Our
industrial container business is seasonally impacted in the Southeastern and
Western United States by the agricultural industries. Reconditioned drum sales
are strongest during a period generally beginning in April and extending
through September, with preseason production for this period running from
January through March.
Euro Currency
On January 1, 1999, conversion rates of the national currencies of eleven
European Union members, including Germany, were fixed against a common
currency, called the euro. Each participating country's currency is legal
tender during a transition period from January 1, 1999, until January 1, 2002,
after which only the euro will be used. We have assessed our internally
developed and purchased information technology applications to determine the
changes needed to process euro-denominated transactions. As a result, our
systems have been changed to process euro-denominated transactions. Beginning
in 2000, the euro is our functional currency.
Changes in Management
In August 2000, Karl Pohler became the CEO of IFCO Online. He subsequently
became the Chief Executive Officer of IFCO Systems in December 2000. Our senior
management changes in 2000 also included the addition of Michael W. Nimtsch as
Chief Financial Officer in October 2000. Our former Chief Financial Officer,
Vance K. Maultsby, Jr., became Senior Executive Vice President, Corporate
Finance at that time. In December 2000, Wolfgang Orgeldinger was added to our
senior management as Chief Information Officer. See "A. Directors and senior
management" in Item 6, "Directors, Senior Management and Employees."
14
Pursuant to the terms of their amended and restated employment agreements,
the employment terms of Vance K. Maultsby, Jr., as Senior Executive Vice
President, Corporate Finance, and Edward E. Rhyne, as Executive Vice President
and General Counsel, ended on June 30, 2001, and they ceased being members of
senior management.
In March 2001, Howe Q. Wallace, formerly Executive Vice President, Human
Resources, ceased being a member of senior management.
B. Liquidity and capital resources
Cash Flow
Our sources of cash, to the extent they originate in different countries
where we operate, are not restricted as to their movement from country to
country.
Our cash requirements generally follow the seasonality of our revenue
generation. In addition, our perishables RPC operations require cash, generally
in the spring, for refund of RPC deposits. See "Seasonality."
Operating activities used $7.7 million in cash in 2000 compared to $36.3
million provided by operating activities in 1999, a decrease of $44.0 million.
Our non-cash operating items in 2000, which includes the loss on sale of our
discontinued manufacturing segment of $59.9 million, the loss on asset
impairment of $4.9 million, and extraordinary loss on early extinguishment of
debt of $5.6 million, increased $75.7 million from $41.5 million in 1999 to
$117.7 million in 2000. Our proceeds from factoring decreased $7.4 million, or
22.5%, from $32.9 million in 1999 to $25.5 million in 2000 due to lower
factored sales volume. Prepaid expenses and other current assets increased
$11.4 million in 2000 compared to a decrease of $0.4 million in 1999. The
increase in prepaid expenses is primarily attributable to fees paid for our
indebtedness, which are being amortized over the respective lives of the debt.
Accounts payable, accrued expenses, other current liabilities and other non-
current liabilities increased $15.8 million in 1999 compared to a decrease of
$31.8 million in 2000, due to more timely payments to trade creditors in 2000
compared to 1999.
Operating activities provided $36.3 million of cash in 1999 compared to
$59.9 million in 1998, which represents a decrease of $23.6 million, or 39.4%.
During 1998 we increased our factoring of accounts receivable, which led to a
one-time positive cash flow of $25.4 million. Accounts receivable, net of
factoring volume, increased $4.0 million in 1999 compared to a decrease of
$27.6 million in 1998 caused by the one-time factoring proceeds. During the
same period, accounts payable, accrued liabilities, and other liabilities
increased $15.8 million compared to an increase of $6.9 million in 1998. These
increases accompanied the higher sales volume in 1999 as compared to 1998.
Cash used in investing activities increased $228.6 million to $265.1 million
in 2000 compared to $36.5 million in 1999. We used $165.4 in 2000 to pay for
the cash portion of the Merger and the 2000 Purchased Companies. Capital
expenditures for RPCs and property, plant and equipment increased $48.5 million
in 2000 to $79.3 million compared to $30.8 million in 1999. We also paid $21.0
million for the options and other rights of GE Erste in 2000.
Cash used in investing activities in 1999 was $36.5 million compared to
$38.8 million in 1998, a decrease of $2.3 million, or 5.9%. The majority of
cash used in both periods was for the purchase of RPCs and property, plant and
equipment. The purchase of RPCs decreased by $10.4 million to $27.7 million in
1999 from $38.1 million in 1998, mainly because of a lower average price for
purchased RPCs due to the product mix. Cash paid for merger costs and new
information technology was $5.1 million in 1999.
Cash provided by financing activities was $280.1 million in 2000 compared to
$7.8 million of cash used in financing activities in 1999. The cash provided by
financing activities in 2000 includes the proceeds of the
15
issuance of our ordinary shares of $203.2 million and net borrowings of long-
term debt of $276.6 million. We also used $23.1 million of cash in 2000 to
repay acquired indebtedness.
Cash used in financing activities was $7.8 million in 1999 compared to cash
used in financing activities of $6.4 million in 1998. The payments on long-term
bank borrowings and capital lease obligations were partially offset by proceeds
from the revolving bank borrowings.
The Merger and Initial Public Offering
In March 2000, we completed the merger of PalEx with and into Silver Oak
Acquisition Corp., our wholly owned subsidiary, which changed its name to
"PalEx, Inc." PalEx subsequently changed its name to "IFCO Systems North
America, Inc." As a result of the merger and related transactions, we own all
of the stock of the IFCO Companies and IFCO North America. In the merger, PalEx
stockholders received merger consideration with a total value of $9.00 per
share consisting of cash and/or our ordinary shares for each share of PalEx
common stock. The total merger consideration for all the shares of PalEx common
stock was $71.4 million in cash and 7.4 million of our ordinary shares based on
elections by PalEx stockholders and adjustments pursuant to the merger
agreement. The total consideration for the merger was $184.5 million for the
PalEx common stock plus the assumption of debt of PalEx, which was $153.5
million as of March 8, 2000.
In connection with the merger, we also completed an initial public offering
of 13.0 million ordinary shares in March 2000 and subsequently issued an
additional 1.95 million ordinary shares upon the underwriters' exercise of
their overallotment option. The total net proceeds to us from the IPO,
including the exercise of the overallotment option, were $203.2 million. The
net proceeds from the IPO were used, along with cash on hand, the net proceeds
from the initial offering of the senior subordinated notes, and borrowings from
our senior credit facility, to repay a substantial portion of the debt of the
IFCO Companies and PalEx, to pay the cash portion of the merger consideration
to PalEx stockholders, to fund the cash payment due to General Electric Capital
Corporation and General Electric Erste Beteiligungs GmbH described below, and
to fund our purchase of the remaining joint venture interest in IFCO-U.S.
In connection with the merger, Schoeller Logistics Industries GmbH and
Gebruder Schoeller Beteilingungsverwaltungs GmbH contributed to IFCO Systems,
directly or indirectly, the outstanding capital shares of IFCO Europe, MTS, and
IFCO International owned by them.
In addition, we, together with Schoeller Industries, the shareholders of
Schoeller Industries, Schoeller Plast Industries GmbH, and Gebruder Schoeller
entered into the Option Release and IPO-Facilitation Agreement with GE Capital
and GE Erste, in connection with the merger and the IPO. Pursuant to that
agreement, Schoeller Logistic Technologies Holding GmbH issued a DM45.0
million, or approximately $19.8 million, convertible debenture to GE Erste in
exchange for the contribution of the preferential share of IFCO Europe owned by
GE Erste. We also paid GE Capital and GE Erste DM43.0 million, or approximately
$21.0 million (as of March 8, 2000), out of the net proceeds of the IPO, the
initial offering of the senior subordinated notes, and the initial borrowings
under our senior credit facility in consideration of the release of GE
Capital's and GE Erste's options and other rights to purchase shares of the
IFCO Companies.
Credit Facilities
On the closing date of the IPO and the merger with PalEx, IFCO Systems and
IFCO North America entered into a new syndicated, secured senior credit
facility, which was amended and restated on March 31, 2000 to complete the
syndication. The syndicate of banks, financial institutions, and other entities
includes Canadian Imperial Bank of Commerce and Bank One, Texas, NA. IFCO North
America is the borrower, and we and our other subsidiaries are guarantors. CIBC
World Markets Corp. and Bank One Capital Markets, Inc., are the co-arrangers,
and Bank One, Texas, NA is also the administrative agent. The senior credit
facility replaced the former credit facilities of IFCO Europe and PalEx's
senior credit facility, the outstanding balances of all of which were repaid in
March 2000 with cash on hand, the net proceeds of the IPO and the offering of
the senior subordinated notes discussed below, and initial borrowings under the
senior credit facility.
16
The results of operations for the year ended December 31, 2000 include an
extraordinary loss on the extinguishment of debt of $5.6 million. The loss
occurred as a result of the write-off of unamortized deferred bank fees and
other charges related to credit facilities that were paid off in conjunction
with the merger and related transactions.
In April 2001, effective December 31, 2000, the senior credit facility was
amended to substantially modify its terms.
Terms of Senior Credit Facility from the Closing Date of the IPO and the
Merger to December 31, 2000
The senior credit facility, until amended effective as of December 31, 2000,
provided for borrowings of up to $235.0 million and consisted of (1) a multi-
draw term loan facility in an aggregate principal amount of up to $108.8
million and (2) a revolving credit facility providing for revolving loans to
IFCO North America of up to $126.3 million. The term loan could be borrowed in
up to 20 drawings commencing on the closing date of the IPO and the merger and
ending on the third anniversary of the closing date. The term loan could only
be used to finance permitted acquisitions. Permitted acquisitions included any
acquisition in which the total consideration paid did not exceed $25.0 million.
Pursuant to the senior credit facility, we obtained consent for three
acquisitions completed during the three months ended September 30, 2000 with an
aggregate purchase price of $89.5 million. In connection with obtaining this
consent, the senior credit facility was amended as of July 31, 2000, so that
the aggregate amount of consideration we or our subsidiaries could pay in
connection with additional permitted acquisitions during any consecutive 12-
month period could not exceed $50.0 million.
IFCO North America had available to it a multi-currency swingline facility
for short-term borrowings denominated in certain readily available and freely
tradable currencies in an amount not to exceed $50.0 million and a dollar
swingline facility in an amount not to exceed $25.0 million. Any multi-currency
swingline loan or dollar swingline loan reduced availability under the
revolving credit facility on a dollar-for-dollar basis. IFCO North America
could obtain letters of credit, in an aggregate amount not in excess of $25.0
million of the revolving credit facility, issued by Canadian Imperial Bank of
Commerce and Bank One, NA. Drawings under any letter of credit are to be
reimbursed by IFCO North America on the same business day if the draw is
presented and notice is provided to IFCO North America prior to 12:00 P.M.
Chicago time. Letters of credit issued also reduced availability under the
revolving credit facility.
IFCO North America was able to draw on the revolving credit facility through
the third anniversary of the closing date of the merger and the IPO and the
revolving credit facility matured on the sixth anniversary of the closing date.
The revolving credit facility could be utilized to make capital expenditures
and to finance the working capital needs of us and our subsidiaries in the
ordinary course of business. The revolving credit facility was also used to pay
fees and expenses related to the merger transactions. The borrowing base under
the revolving credit facility was based on a percentage of our eligible
accounts receivable, eligible inventory, and eligible RPCs. Eligible accounts
receivable excludes accounts receivable in certain European countries in which
a security interest in such receivables cannot be perfected. Eligible inventory
includes pallets that we and our subsidiaries own for rent to third parties.
Eligible RPCs include those RPCs owned by IFCO-U.S.
The outstanding amounts under the term loan and the revolving credit
facility, as well as the swingline facility described below, bore interest at
interest rates determined based upon our consolidated total leverage ratio,
which was defined in the credit agreement for the senior credit facility, and
changes quarterly. The rates ranged from a high of 300 basis points over LIBOR
and 200 basis points over prime rate, if our consolidated total leverage ratio
was greater than 3.25, to a low of 200 basis points over LIBOR and 100 basis
points over prime rate, if our consolidated total leverage ratio was less than
1.75. The senior credit facility established a 25 basis point increase if the
consolidated total leverage ratio was 1.75 to less than 2.25 and a similar
increase for each .50 increase in the consolidated total leverage ratio.
Generally, we could elect one-, two-, three- and six-month LIBOR. As of
December 31, 2000, the outstanding debt under the term loan and revolving
credit facility had a weighted average interest rate of 9.0% per annum.
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The outstanding amounts under the term loan and the revolving credit
facility were repayable in 12 consecutive quarterly installments commencing in
June 2003 in an aggregate amount for each 12-month period equal to 20% in the
first period, 30% in the second period, and 50% in the third period.
Terms of Amended Senior Credit Facility, Effective as of December 31, 2000
In April 2001, we entered into an amendment of terms on the senior credit
facility with an effective date of December 31, 2000. The amended senior credit
facility provides for borrowings of up to $178.0 million and consists of (1) a
term loan facility in an aggregate principal amount of $78.0 million and (2) a
revolving credit facility providing for revolving loans to IFCO North America
of up to $100.0 million that we may draw on until February 4, 2003. There are
no additional borrowings available on the amended term loan, nor are there any
further permitted acquisitions. The principal balance of the amended term loan
must be reduced by the proceeds of certain asset sales, as defined, including
the proceeds from the sale of IFCO North America's new pallet manufacturing
operations. The amended term loan is payable in monthly installments of $0.7
million beginning in September 2001, with the balance due in February 2003,
which is also the new maturity date of the amended revolving credit facility.
The aggregate amended term loan amount is permanently reduced by any required
principal reduction.
The amended senior credit facility provides multi-currency and dollar
swingline facilities in the amounts of $50.0 million and $10.0 million,
respectively, essentially on the same terms as the senior credit facility.
Letters of credit continue to be available pursuant to the amended senior
credit facility in an aggregate amount not to exceed $25.0 million on
essentially the same terms as the senior credit facility. Loans under the
amended senior credit facility may, however, no longer be made in Canadian
dollars.
The amended senior credit facility permits cumulative capital expenditures
in the amount of $26.5 million through June 30, 2001, $37.8 million through
September 30, 2001, $47.0 million through December 31, 2001,and $50.0 million
for each four-quarter period ending thereafter.
The amended term loan and amended revolving credit facility bear interest
from a high of 400 basis points over LIBOR and 250 basis points over prime
rate, if our consolidated total leverage ratio is greater than 4.50, to a low
of 275 basis points over LIBOR and 200 basis points over prime rate, if our
consolidated total leverage ratio is less than 3.00. The amended senior credit
facility establishes a 25 basis point increase for LIBOR margin if the
consolidated total leverage ratio is 3.00 to less than 3.50, a 50 basis point
increase if the consolidated total leverage ratio is 3.50 to less than 4.00, a
25 basis point increase if the consolidated total leverage ratio is 4.00 to
less than 4.50, and a 25 basis point increase if the consolidated total
leverage ratio is over 4.50. The amended term loan and amended revolving credit
facility establish a 25 basis point increase for prime rate margin if the
consolidated total leverage ratio is 4.00 to less than 4.50 and a 25 basis
point increase for prime rate margin if the consolidated total leverage ratio
is over 4.50.
There was $136.0 million outstanding under the amended senior credit
facility as of December 31, 2000, including (Euro)51.1 million (or $48.0
million) under the multi-currency swingline facility, $78.0 million under the
term loan, and $10.0 million under the revolving credit facility.
On June 12, 2001, we entered into an amendment to the amended senior credit
facility. The amendment includes the following changes: (1) amending the
definition of consolidated EBITDA by reducing the maximum allowable non-
recurring expenses or losses that can be added to consolidated net income in
determining consolidated EBITDA, other than those expenses or losses related to
IFCO North America's sale of its pallet manufacturing business; (2) granting to
us and IFCO North America 180 days (an increase of 30 days) from the end of
IFCO North America's 2000 fiscal year to provide the 2000 audited financial
statements to the administrative agent and the lenders (which was waived
through July 3, 2001); (3) restricting payments in respect of the senior
subordinated notes and the subordinated seller notes when a default or event of
default occurs and is continuing; and (4) adding certain short term debt to the
forms of obligations that we and IFCO North America agree not to make optional
payments in respect of or modify, other than modifications that would extend
the maturity or reduce the amount of interest payments or principal due in
respect of such
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obligations. In addition, the administrative agent and the lenders also
consented to the asset sale of certain of our pallet manufacturing operations
and the assignment by us of promissory notes received by us as consideration
for the asset sale to the administrative agent for the benefit of the lenders.
Terms Common to the Senior Credit Facility and the Amended Senior Credit
Facility
IFCO North America's obligations are guaranteed by us and substantially all
of our existing subsidiaries and each of our future direct and indirect
subsidiaries, other than subsidiaries deemed immaterial by the administrative
agent. IFCO North America's obligations and the guarantees are secured by a
perfected first priority security interest in all of the loan parties'
substantial tangible and intangible assets, except for those assets the co-lead
arrangers determine in their sole discretion that the costs of obtaining the
security interest are excessive in relation to the value of the security.
The amended senior credit facility contains a number of covenants that,
among other things, limit our and our subsidiaries' ability to dispose of
assets, incur additional debt, merge or consolidate, pay dividends, create
liens on assets, enter into sale and leaseback transactions, make investments,
loans, or advances, make acquisitions, make capital expenditures, prepay debt,
or engage in certain transactions with affiliates, and otherwise restricts
certain corporate activities. In addition, we and our subsidiaries are required
to comply with specified ratios and tests, including a minimum net worth test,
a fixed charge coverage ratio, an interest coverage ratio, a leverage ratio,
and a minimum EBITDA requirement. The senior credit facility contained all the
same terms. At December 31, 2000, we were in compliance with all financial
covenants of the amended senior credit facility.
The amended senior credit facility contains customary events of default,
including non-payment of principal, interest, or fees, material inaccuracy of
representations and warranties, violation of covenants, cross-default to
certain other debt, certain events of bankruptcy and insolvency, certain events
under ERISA, material judgments, actual or asserted invalidity of any
guarantee, security document, subordination provision, or security interest,
and a change of control in certain circumstances. The senior credit facility
contained all of the same terms.
The approximate level of borrowings available under the senior credit
facility as of December 31, 2000 was $42.0 million. The approximate level of
borrowings available under the amended senior credit facility as of June 19,
2001 was $2.5 million.
Senior Subordinated Notes
On March 8, 2000, we issued (Euro)200.0 million principal amount of senior
subordinated notes in a private placement. The total net proceeds to the
Company from the issuance of the senior subordinated notes were $184.7 million.
The senior subordinated notes mature on March 15, 2010. Interest at the rate of
10 5/8% per year from the date of issuance is payable semiannually in arrears
on each March 15 and September 15, commencing September 15, 2000. The senior
subordinated notes are not secured, but are guaranteed by the Company's
material subsidiaries. The senior subordinated notes and the guarantees rank
behind all of our existing and future senior debt, including our obligations
under our senior credit facility. The indenture governing the senior
subordinated notes contains a number of significant covenants, which restrict
our corporate and business activities, including its ability to dispose of
assets, incur additional debt, prepay other debt, pay dividends, repurchase or
redeem capital stock, enter into specified investments or create new
subsidiaries, enter in to sale and lease-back transactions, make specific types
of acquisitions, engage in mergers or consolidations, create liens, or engage
in certain transactions with affiliates.
Receivable Factoring
The amended senior credit facility and the senior subordinated notes permit,
and the senior credit facility permitted, specified levels of receivable
factoring. Several years ago, IFCO GmbH and, subsequently, other
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subsidiaries of IFCO GmbH, entered into factoring agreements under which these
IFCO GmbH companies could offer all of their trade receivables to a factoring
agent. In 2000, subsequent to the IPO, IFCO GmbH and these subsidiaries entered
into new factoring agreements with the factoring agent, DG Diskontbank. Under
the factoring agreements, the sales price is the nominal value of the
receivable less a factoring fee of 0.45% of the nominal value of the factored
receivables. The factoring agent has the right to collect the receivables and
bears the collection risk. The factoring agent is required to remit 75% of the
factored receivables to these IFCO GmbH companies. The remainder, less the
factoring charge, is held in an escrow account and is remitted to these IFCO
GmbH companies following collection. The interest rate on cash advances
relating to factored receivables is based on the three-month EURIBOR rate plus
1.25%, or 6.22% as of December 31, 2000. These IFCO GmbH companies factored
approximately 46% of their receivables and incurred factoring and interest
charges of $4.0 million, $4.3 million, and $3.6 million for years ended
December 31, 1998, 1999 and 2000, respectively.
Capital Lease Obligations
The Company has entered into leases with third parties principally for RPCs
that are accounted for as capital leases.
Future Liquidity; Financing Prospects
Our sources of cash liquidity include cash from operations and amounts
available under the amended senior credit facility. These sources may not be
sufficient to finance our capital requirements and our desired level of growth.
Further, we are required to use the entire proceeds of the sale of our new
pallet manufacturing business to permanently reduce the amounts due and total
availability under the amended senior credit facility. Therefore, the pallet
manufacturing sale will not provide any improvement to our future liquidity,
except for the interest savings anticipated from lower debt levels.
Our current level of profitability and cash flow may limit our ability to
attract new sources of equity capital that would be favorable to the Company's
current shareholders. Any possible inability to generate sufficient cash from
operations, lack of availability under the amended senior credit facility, or
the absence of other sources of debt or equity capital may have a material
adverse affect on the Company's ability to operate and our results of
operations for 2001.
We are pursuing additional financing, including additional sources of
equity, sale-leaseback financing, additional sales of assets, and increased
receivables factoring. We cannot, however, assure you that we will be able to
obtain additional financing, that any additional financing will be on terms
that are as favorable to us as our existing debt, or that sufficient cash will
be provided by operations. If we fail to obtain additional financing, we fail
to obtain any new financing on terms that are materially less favorable than
those of our existing debt, or if sufficient cash is not provided by
operations, any of these occurrences, or any combination of them, could have a
material adverse effect on our results of operations and financial condition.
C. Research and development, patents and licenses, etc.
Research and development
The growth of our RPC operations reflects a history of devotion to product
and systems innovations and creativity, and is a core value of the Company. Our
research and development activities occur in tandem with our marketing efforts.
We strive to lead as well as support the materials handling marketplace with
new products and services while simultaneously expanding both markets and
geographic coverage with our products and materials handling services. As the
marketplace requires, we will strive to add new services and materials handling
products to our existing product and service offerings.
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We are engaged in ongoing product improvement efforts with our RPC suppliers
to make our RPCs more durable and handling-efficient with a lower cost per trip
and to develop new products. These research and development efforts are
conducted by the supplier pursuant to the terms of the applicable supply
agreements and do not involve separate research and development expenditures.
See "B. Business overview--Suppliers and Raw Materials--Returnable Plastic
Containers" in Item 4, "Information on the Company" and "B. Related party
transactions--Supply Agreements" in Item 7, "Major Shareholder and Related
Party Transactions" for a description of these supply agreements.
We intend to develop tracking and tracing technology in the materials
movement industry through IFCO Online. See "B. Business overview--Systems and
Services--IFCO Online." in Item 4, "Information on the Company." Radio
frequency identification, or RFID, technology is, in principle, existing and
proven. We continue to evaluate the currently available RFID technology, as
well as potential strategic technology partners including those that can
provide technology platforms, universal tracking and tracing software and
hosting services. We will take the initiative to develop standards unique to
product movement and incorporate them into our own tracking and tracing
technology. A pilot program for our tracking and tracing system with one or a
few select customers is planned for 2001. In 2000, we incurred $1.4 million in
costs and expenses related to the development of the tracking and tracing
programs at IFCO Online.
Given the nature of the pallet services, industrial container, and new
pallet manufacturing businesses, we do not have any material product research
and development expenditures in those operations.
See "B. Business overview--Intellectual Property" in Item 4, "Information on
the Company," for a description of our patents and other intellectual property.
D. Trend information
See "A. Operating Results--Year Ended December 31, 2000, Compared to Year
Ended December 31, 1999" and "B. Liquidity and capital resources--Future
Liquidity; Financing Prospects."
Business Outlook
We have had no significant increases in our inventory in relation to our
sales levels. We also experienced no significant increases in costs and selling
prices, except for additional freight costs incurred in Europe, primarily
resulting from an approximately 15% increase in fuel costs. Raw material costs
for RPCs and reconditionable drums are relatively stable. Our pallet recycling
business is more sensitive to labor costs than to lumber prices; however, labor
availability and lumber costs are likewise relatively stable.
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SIGNATURES
The registrant hereby certifies that it meets all of the requirements for
filing this amendment on the form indicated and that it has duly caused and
authorized the undersigned to sign this amendment on its behalf.
IFCO Systems N.V.
/s/ Michael W. Nimtsch
By: _________________________________
Michael W. Nimtsch
Senior Executive Vice President
and Chief Financial Officer
July 11, 2001
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